Does the lender consider my business as collateral?

Lenders will place a UCC-1 blanket lien on your business and the cash flow of your business is what they are counting on to secure the loan. They will also require a personal guarantee from the borrower(s). However, neither are considered as traditional bank collateral. For conventional lenders this is enough, for SBA lenders additional collateral may be required (if available).

What about my house or personal property collateral?

• Conventional lenders as a general rule do not require personal property for collateral
• It is an SBA requirement that for loans over $350K, if you have 25% equity in any personal real estate, including residential and investment property, that it be required as collateral, up to the full loan amount. Personal Real Estate Collateral for Loans >$350,000:

25%+ Equity Requirement: If business assets don’t fully secure the loan, lenders must take a lien on personal real estate (residential or investment) with 25% or more equity, based on appraised value (not fair market value). Equity = Appraised value – Outstanding liens.

Appraisal Standard: Independent appraisals are required for real estate collateral on loans >$250,000, ensuring accurate valuation.

Lien Position: Lenders take a first or second lien (junior to existing mortgages) on real estate, up to the loan amount or available equity.

Less Than 25% Equity: Real estate with <25% data-preserve-html-node="true" equity is not required as collateral, but lenders may choose to take it to enhance security.

Example: For a $600,000 7(a) loan, a borrower’s home (appraised at $500,000, $350,000 mortgage) has $150,000 equity (30%), triggering a junior lien. A property with $50,000 equity (10%) can be skipped unless the lender opts to include it.

Exception state for primary house collateral?

Texas is the only state that our SBA lenders will not collateralize the borrower’s primary residence even if they own the house outright. However, additional properties owned where 25% equity is available, the SBA lender may attempt to collateralize those.

If property is used for collateral is life insurance still required?

The SBA lenders will be fully collateralized by either real estate property, life insurance, or a combination of both. The amount of equity in your property is deducted from the life insurance requirement. If the loan is fully collateralized with the property no life insurance would be required.

What to know about commercial real estate collateral?

• The costs to the borrower are significantly higher for collateralized commercial real estate.
• The appraisal can cost $2,000 or more and if the loan amount is over $750K a phase 1 environmental report is also required which can cost around $1,500.
• If the property used to be a dry cleaners or a gas station even 20 years ago, a phase 1 environmental report is required.
• Appraisals and title work take about twice as long as a residential property.

Can I use marketable securities instead of property?

In some cases, securities can substitute for real estate collateral, depending on lender requirements.

Securities as Collateral:Marketable securities (e.g., stocks, bonds) or whole life insurance cash value can be used if they have verifiable value and liquidity, per lender standards. They don’t need to cover the full loan amount, but their value must contribute significantly to securing the loan.

Lenders prioritize business assets and real estate with 25%+ equity. Securities are considered if these are insufficient or if you negotiate a substitution to avoid a home lien. The collateral’s net realizable value must support the loan amount.

Example: For a $400,000 loan, business assets cover $250,000, and your home has $150,000 equity (30%). You offer $150,000 in marketable securities instead, which the lender accepts, avoiding a home lien.

How much does the title work costs?

The cost of title work depends on the value of the property, but is generally about $1,500. Some state have UCC filing taxes or mortgage taxes, these can significantly increase the cost of closings, New York and Florida are the most prominent mortgage tax states, and Tennessee also has a UCC filing tax.

Who pays for the property appraisals and title work?

The borrower. The bank orders and handles this but is usually part of what a deposit is applied for.

What if my property still has a mortgage?

Most properties that are collateralized in SBA loans we deal with has an existing mortgage. The lender providing the mortgage is in first lien position. The SBA lender comes in at second lien position, or third position if there is a HELOC.

What if I have a HELOC?

Any amount taken out in a Home Equity Line Of Credit is deducted from the 25% equity rule. If the property with a HELOC is being collateralized, then the SBA lender would be in third lien position, with the mortgage in first, and the HELOC in second.

Refinancing and HELOC after SBA loan is funded?

An SBA lien on your home affects future financing options, but flexibility remains under certain conditions.

Refinancing: You can refinance a collateralized home to lower rates or adjust terms, but cash-out refinances are restricted to protect the SBA’s lien position. The SBA lender must approve refinancing to ensure the new mortgage doesn’t impair their collateral (e.g., no cash-out reducing equity).

HELOCs:

Existing HELOCs: Can remain in place post-loan funding, maintaining access to available credit.

New HELOCs: Not prohibited by SBA rules, but SBA lenders may restrict new HELOCs via loan agreements to preserve collateral value. Check with your lender before pursuing a new HELOC.

Example: With an SBA second lien on your home, you refinance your $350,000 mortgage at a lower rate, keeping the balance unchanged. A new HELOC may require lender approval to avoid equity reduction.

Selling my house when there is a lien?

Selling a home with an SBA lien requires coordination with your lender to release the lien and manage proceeds.

Process: Notify your SBA lender of the sale. The primary mortgage is paid off first, followed by any HELOC. Remaining equity is held in escrow by the lender or applied to the SBA loan balance. You can:

Purchase Replacement Property: Apply escrowed equity to a new home or property, with the SBA lender taking a lien on the replacement to maintain collateral security.

Reduce Loan Balance: If not purchasing a replacement, escrowed equity is applied to the SBA loan, reducing the principal.

Example: You sell a collateralized home for $500,000, paying off a $350,000 mortgage. The $150,000 equity is escrowed. Buying a new $400,000 home, you apply the $150,000, and the SBA takes a lien on the new property. Otherwise, it reduces your $600,000 loan balance.

Mitigating options for house collateral?

A HELOC can reduce your home’s available equity, potentially avoiding an SBA lien, but it’s not a guaranteed exemption.

25% Equity Rule: For SBA 7(a) and 504 loans >$350,000, personal real estate (e.g., your home) with 25% or more equity (appraised value minus liens) must be used as collateral if business assets don’t fully secure the loan. A HELOC deducts from this equity, as it’s a lien against the property.

How It Works: A HELOC places a second lien behind the primary mortgage. The SBA lender takes a third lien if both a mortgage and HELOC exist, or a second lien if only a mortgage is present. Reducing equity below 25% (e.g., from 30% to 15% with a HELOC) means the home is not required as collateral, though lenders may still take it at their discretion.

Example: Your home is appraised at $500,000 with a $350,000 mortgage ($150,000 equity, 30%). A $75,000 HELOC reduces equity to $75,000 (15%), potentially avoiding an SBA lien for a $400,000 loan if the lender agrees.

Does my spouse have to sign anything?

The signature of the spouse would only be required on the specific collateral document if the spouse is also on the title.

Why am I being “penalized” for having equity?

It can be frustrating to have to use your house/property for collateral when you know that the bank would approve your loan without it if you didn’t have the property equity.

The SBA helps advisors without collateral to still get a loan but requires those that have collateral, and enough of it, to be collateralized. The SBA is trying to walk the line of balancing the assistance to small business owners without property collateral to get funding, with their responsibility to the U.S. tax payer who will be on the hook (so to speak) for a loan default.